The RBI's rate-cut decision was widely expected by economists and business leaders, who for months have been calling for lower lending rates to help the economy, which grew at just 5.3 per cent in the quarter to September.

India's inflation eased to a three-year-low of around seven per cent in December, but is still above the bank's comfort zone of around five per cent.

China, South Korea and Brazil have all cut interest rates to shield their economies from the effects of the eurozone debt crunch.

Until Tuesday's move, the RBI had kept rates unchanged since April last year saying inflation needed to fall further and government spending needed to be curbed.

The Congress-led government has introduced a string of new measures since September to encourage foreign investment and reduce its subsidy bill which had led to a ballooning fiscal deficit.

In a report on Monday, the RBI said the reform measures announced so far have not decisively lifted business sentiment and more “action may be needed” to restore confidence.